Innovation Management - Role of the Accounting function

"If you ever become a marketer, then your friend in the company should be the accountant"

These were the words of advise given to me by my Marketing professor at Red McCombs School of Business in University of Texas, Austin. I recall this statement every time I think of costs involved in new product development or in every marketing endeavor I undertake.

The above words also applies to all persons leading an Innovation projects: Be it new product development, process improvement or research.

In the world of innovation, accountants & their contribution are one of the least appreciated. A success/failure of an innovation project is credited to the project manager or product manager or the development manager, but rarely the name of finance controller/accountant are even mentioned - sad but true.

The reason for this apathy is really simple: Engineers or product managers or development managers are far disconnected from the world of finance & accounting departments, that they really have no clue about the actual numbers. The problem is more acute in large companies, where functions and roles are so widely distributed that the development/product manager has no clue as where the accountant works! Added to the organizational complexity, there is a natural tendency among engineers to focus on the product - rather than monitor the expense accounts. Many engineers also find it extremely challenging to read an account books.

Accounting is a very important function

The role of the accountant is to maintain records of all expenses, keep financial checks and balances within the organization. All the great innovation ideas and projects can vanish in the wake of an accountant’s recommendation - So never underestimate the power of the accountant. Accountants control the money taps - they can turn it on or off.

Accountant is your partner

I remember a time when I was bidding for an IT project. The person with whom I had to work closely to develop the financial model was an accountant - a Chartered accountant. Together we developed the cost models and based on the cost models, we cameup with a pricing model to present it to the client.

When developing a plan for an innovation project, it is best to sit with an accountant and comeup with a financial plan. Gather the financial information that determines the viability of the project, at what levels of expenditure the projects become unviable, develop a plan to monitor the project expenses and constantly review the viability of the project. To do all this, you have to work with the accountant as a partner in progress.

Also remember this: Money speaks louder than ideas!

So if your idea is backed by the accountant, then people will listen to you.

Track all your Costs
Once a project is approved, then managers need to keep a close tab on the costs of the project. But that’s in an ideal world.
Reality in most organizations is that product/development managers have little clue of what their current costs are, what their total costs is, and how much more money will they need to complete the project. I have spoken to several development managers in several fortune-500 companies, and they don’t know their numbers, instead they will talk about the time frame of the project, head count etc., but not the numbers - because they do not know the numbers and nobody in the organization will ever tell them.

Smaller companies tend to do better. Managers in smaller companies know the costs and therefore can take better and faster decisions.

Understanding all the costs is a critical step in managing the project. It will help you plan better and know when and where to manage the costs. Accounting information also helps you to know when it is a good idea to kill a project. Kill the project when you know that the project does not deliver the promised financial returns to the investors. Here again your friend in the accounting department can give you with the required data for NPV, IRR financial analysis.

Money speaks louder that your ideas

Investors are constantly looking at the returns on their investments. So when you have a bright idea - but do not have the numbers to support it, the chances are that your ideas will not be considered for investment. But when you can substantiate the idea with profitability and have a thorough financial plan to support it, you will be heard and often the ideas will get approved.
New products will never sell itself to investors without the financial justification.

Product Development & Budgeting

New product development requires money - and that means budgets & an exercise in budgeting. Accountant will keep a track of the money spent for the project and can notify you at the first sign of trouble - way before you can exceed the budget. Such timely warnings will help you manage the operations and take better decisions.

Closing thoughts

Innovation Managers must know at least the basics of accounting to understand the numbers. Managers should take the initiative to contact the right person in the accounting department and then work as a team.

Risk Tolerance & Innovation in India - A cultural insight

Indian businesses are known for their low risk tolerance. Even in a high competitive, research oriented industry such as Pharma, Indian firms: Cipla, Ranbaxy, Dr Reddy Labs, Sun Pharma etc., thrived on reverse engineering and producing generic versions of patented drugs.

Things changed in 2005, when India switched to product patent regime. Indian pharma companies promptly adopted by hiving off their R&D divisions into separate ventures. Their main rationale to spin of the R&D centers:- "Reduce Risks"; Drug research is expensive and returns are not guaranteed, therefore investments in R&D will affect the profitability of the company and will reduce share holder value, thus by spinning of the R&D unit into a separate venture, the R&D expenses will be off the books. Since the Indian investors are looking for immediate returns - which will be met by selling generics, companies were happy to spin off their R&D wings.

For more information see: http://www.thehindubusinessline.com/2007/12/05/stories/2007120554120900.htm

The other rationale for spinning off the R&D part of the business is to capitalize on India’s R&D strengths by having tie-ups with global pharma firm’s R&D efforts.

"Four major drug firms -- Dr Reddy's Laboratory, Sun Pharmaceuticals, Nicholas Piramal India Ltd and Ranbaxy Laboratories -- spun off their research and development and drug discovery operations into separate units to unlock better value for shareholders and attract funds for new products. The collective market capitalization of new research entities is estimated to touch $120 billion in less than a decade."

For more information see: Indian pharma cos on R&D drive in 2007

What can we learn for this?

The collective exercise of Indian pharma companies gives us insights into the workings of the Indian culture and its attitude towards innovation:

• Indian companies will invest in product innovation only when they are forced to do so.
• Protecting shareholder value is most important. I.e., Companies are not high on risk tolerance, unlike the American businesses, Indians will not bet the company on any product innovation.
• Indian companies are high on leveraging their strengths - Spin off their R&D units and get external investors to fund the R&D part of the business. Thus attracting a different set of investors who have higher risk tolerance

Killing Creativity

Employees are always creative, so the organization takes all the efforts to kill creativity. Often times when an idea is generated, it will still be in infancy and may sound impractical - or even absurd. Thus making it the perfect time to kill the idea.

The common phrases used to kill ideas are:

1. A good idea, but …
2. Let's sit on it for a while.
3. Let's form a committee.
4. It is against company policy
5. Who else has tried it?
6. Costs too much
7. All right in theory
8. Be practical
9. Too hard to administer
10. The old timers won't use it.
11. We've never done it that way.
12. It's not budgeted.
13. It's not good enough.
14. It needs more study.
15. Don't start anything yet.
16. We've been doing it this way for a longtime and it works.
17. Why hasn't someone suggested it before if it's such a good idea?
18. This is way ahead of the times
19. Let's take a survey first.
20. It's not part of your job.
21. Let's discuss it.
22. Let's get back to that.

If you are a manager or a leader in your organization and is reading this blog, then please remember not to use the above phrases and kill a creative idea in its bud.

Why Companies fail to innovate?

Today companies are scrambling to be innovative. Success stories of innovation at Apple, Google, Toyota, Samsung, GE, P&G, etc., has made innovation as a key requirement in many organizations.

Several companies in BRIC economies are now thinking on how to build a culture of innovation in their organization. However hard they may try, many of these firms will fail to build a culture of innovation if they do not overcome the following shortcomings.

I have compiled the areas where most Indian companies have serious challenges when it comes to creating a culture of innovation in their organization. The challenges can be classified into three broad categories:

1. Leadership

• Lack of Vision or strategy for innovation
• Setting short term goals for innovation
• Lack of an innovation policy or an unclear policy
• Focus on past & current successes rather than the challenges of the future
• Company wide commitment towards innovation is missing
• Company leaders do not take ownership for innovation
• Innovation is deligated to mid-level management
• Top leadership is constantly shifting priorities
• Top management is unwilling to change at the pace demanded by innovation.
• Company Politics in resource allocation for innovation and recognition
• Stong hierarchy - over-management and review of new ideas
• Micromanagement by top management
• Risk aversion at the top management - Punishment for failure
• Rewarding crisis management rather than crisis prevention
• Underfunding new ideas in the name of profitability or business needs
• Unwillingness to kill an innovation projects that are not succeeding.

2. Human Resources

• Inadequate "innovation coaching"
• Lack of awareness towards Intellectual property rights
• Lack of creativity training
• Lack of proper brainstorming facilties
• Idea review by "senior" committee
• No reward & recognition programs
• Innovation not part of the performance review process
• Innovation management is an ad-hoc process
• Innovation is a function of R&D department
• Culture that promotes hierarchy & power position over merits/performance
• Overloaded workforce - capable persons are overwhelmed with work
• Micromanagement by mid-level managers
• Lack of creativity time for employees
• No policies to encourage and manage networking with other organizations
• Lack of opportunities for employees form formal & informal networks
• Lack of customer interaction or Inadequate understanding of customers’ needs
• Addiction to left-brained, analytical thinking - "data is God".

3. Company Systems

• No systems to capture and document ideas
• Inadequate knowlege management & knowledge sharing systems (KMS)
• Inadequate systems to capture knowledge from past failures & past successes.
• Lack of Innovation management tools
• Lack/limited of access to global information databases
• Lack of work collaboration, work flow management tools
• Lack of interaction with Universities and other organizations
• Current IT systems are rigidly managed with little inputs from users

In most cases, the task of creating a culture of innovation involes removing the above mentioned bottlenecks and then create adequate support systems to encourage innovation. People are naturally creative, when they are provided the right environment, innovations will start flowing naturally.

Ninedots, an Innovation consulting company in Bangalore helps organizations build a culture of innovation by looking into the organization’s current leadership, current practies and systems and advising on the action plan. Ninedots also conducts training in creativity, innovation, change management, problem solving & decision making, innovation managment, IPR, and leadership for innovation.

Tata’s EKA will usher a new computer revolution

A month ago world was surprised by Tata’s EKA - the world’s fourth fastest super computer built by Computational Research Laboratories (CRL) ), a wholly owned subsidiary of Tata Sons.
For the first time in the world, a private company which has no experience in building computers - let alone high performance computers(HPC), has ever build such a computer. The story of EKA’s development will be good innovation casestudy.

"CRL's supercomputer, EKA, has put India at the forefront of high performance and supercomputing technology globally. EKA gives us the ability to address applications in multiple disciplines including software development and research," said S Ramadorai, chairman of CRL and CEO and MD of Tata Consultancy Services. "The successful launch of the supercomputer has been driven by an exemplary team at CRL working collaboratively with scientists across the Tata Group."

Tata Industries have always demonstrated their risk taking abilities and their vision for the future. With EKA, Tata’s have heralded a begining in the era of super computing for the masses. EKA can provide an ideal platform for Tata Consulting Services (TCS) to offer high performance computing services - The opportunities in this space is estimated to be about $31 billion. EKA opens the doors for TCS to offer a wide range of services in terms of:

• HPC consulting, (HPC - High Performance Computing)


• HPC Software development,


• Outsourced Product development


• Data center management,


• Remote Infrastructure management


• Grid Computing or Offer computing power as an utility


• Build, sell & maintain super computers for other agencies.

Having demonstrated such a spectacular success, Tata’s should now capitalize on it. India can become a center for offering super computing services.

IBM, Google, Yahoo, Amazon and few others are contemplating on offering Grid computing, TCS or Tata’s can join them in doing the same by selling computer power to corporations, R&D labs and government agencies all over the world.

Selling massive amounts of computing power is made feasible by Tata’s VSNL, a long distance telecom company, that is built the largest undersea fiberoptic network - to carry all the needed bandwidth.

This is just the begining of Indian Innovation powers. Indian Innovation and Entrepreneurship will be the key driver of the global economy in the 21st century.
Congrats & Thankyou to all the team members who developed EKA.

Also See:


http://www.tata.com/tata_sons/releases/20071113.htm
Google and the Wisdom of Clouds

Value of Divergent Thinking

Assume that you are a manager and you assemble your team for an important meeting to solve an existing problem. In this meeting, the moment you describe the problem, there will be one or two persons who will come up with a possible solution and the rest of the team members agree with one solution or the other, and finally the team votes or builds a consensus on the proposed solution. The meeting is over and every one come out happy with the quick result.

An alternate scenario will be that, the moment the manager describes the problem, everyone agrees with the problem statement, and the manager immediately explains his solution to the problem & every team member agrees with the manager and the meeting is over.

Another possible scenario will be that, once you have described the problem, there will be two or three possible solutions being proposed by the senior/experienced staff members - and the rest of the team takes sides with one person (and the associated idea) and the meeting breaks down into a fierce debate - being fought on political grounds, where each party wants to prove that their solution is better than the other group’s solution. Often times the political battle rages on till one side wins or till the problem disappears.

In most cases( ~99%) the standard response to the problem being posed will fall in the above categories. Only in a rare case, the group will come out of the meeting with the idea that they need to think for more possible solutions. And in the rarest of circumstances, the team will come out with hundreds of possible solutions - this is almost a one in a million case.

In my experience, I have always seen that most people are happy with one or two satisfying solutions to any given problems. Many a times managers, who are responsible for problem solving, limit the ideas to a small set and then encourage people to discuss the merits/demerits of the limited set of ideas. Even when managers are presented with a complex problem and the manager calls for a brainstorming session, the final set of ideas/solutions taken out from the session will be very few - mostly one or two ideas.

This type of behavior is called convergent thinking - i.e., people tend to converge and select on a small set of possible solutions - which are then analyzed in great detail before implementing it. People want to find a solution to the stated problem at the earliest and the first solution which satisfies the need becomes the final solution.

Convergent thinking is a natural process for all adults. People are often forced to think that there is only one correct answer, thus when they find the fist answer, they stop thinking. It is also influenced by our ability to carry multiple ideas in our heads and think through all the possibilities. This behavior is also seen in sports: Only in a few sports such as chess, Golf, & poker players tend to work on multiple options while in rest of the sports the response is immediate - almost done on instinct or with very little thought.

Divergent Thinking

The term "Divergent Thinking" was coined by Joy Guilford. Divergent thinking refers to the ability to generate several ideas from a single input. It is the ability to produce many ideas, to produce unusual and original ideas, and to take an idea and spin out elaborate variants of the idea. Not all ideas generated by divergent thinking need not be necessary correct or even workable; the ideas may be fanciful, outlandish, impractical and even absolutely wrong.

Divergent thinking is an innate human ability to think of several ideas or possibilities - all ideas generated by the human brain. Human brain has the ability to imagine things and come up with ideas; even when we are aware that such an idea may not be practical or viable. Most often, people do not express such ideas; instead people tend to express what is perceived as feasible ideas only.

To illustrate, think about traveling from your home to your workplace. The moment you read the sentence, you would have thought of one most common route, and then a few alternative routes. This is typical convergent thinking. If I were to ask you to chart out 100’s of different route to travel from your home to workplace, then you will take time and think of all possible ways, and many of them will be wild & absurd ideas(eg. San Jose to San Francisco via New York), but a few will be practical options ( Can I use BART, Caltrains or take a bus? Or look up the map for what other alternates I can use to drive) This is divergent thinking.

Benefits of Divergent Thinking

The value of divergent thinking lies in making people think, making people think deliberately and in that process, people come up with some great ideas.

In a typical business scenario, the normal practice is jump into a final solution at the earliest. This is almost an instinctive behavior. But this limits the options and it often relies on past experience and almost never considers the new & untested ideas. Divergent thinking on the other hand, forces people to think of all possibilities and in that process generate new ideas or solutions.

Take a look at all the successful products that are out there: Starbucks Coffee, Tivo, iPod, Google, Pentium, etc. These were not the first in the market, they were late comers to the market and they succeeded beyond the wildest dreams of their creators.

A common factor among them is that the success of the products relies on a new idea - a new way to sell coffee, a new way to enjoy music, most effective information gathering in Internet, a new way to market CPUs.

These ideas are the products of divergent thinking.

Another way to look at the value of divergent thinking is to look at the competitive markets. When two companies are competing, their product lines will be very similar, so if one wants to outsmart the competition, then one has to think of ideas that are dramatically different that that of the competition.

Pepsi & Coca Cola are fierce competitors, and Pepsi was able to surpass Coca Cola by entering into enegry/sports drinks, fruit juices etc.

Success is fully dependent on execution of radical ideas - but radical ideas is the starting point - One can get these radical ideas only by divergent thinking.

How to do divergent thinking

Divergent thinking is not a natural process for the human mind. One has to deliberately work it out. The most common way to do divergent thinking is to brain storm. Brain storm for 10-15 minutes, document all the ideas that came out and discard the first 10-15 ideas. The ideas that come out in first few minutes are all based on past experiences and there will be nothing radical in it.

The next step is the true divergent thinking - Continue to brain storm for next one hour and capture all these ideas. The ideas that flow in this stage are truly the products of divergent thinking. At this stage, people will come out with new, untried, untested, bold, radical, crazy, impractical-at-the-first-sight ideas. These ideas will be tough to act on and often people in the room have no clue as to how they can execute these ideas. This leads to the next stage - the stage of critical thinking.

Divergent thinking requires a new way of working. This is best illustrated by the following figure:

The first step is to clearly define the problem statement or the task at hand and then describe the desired end state, i.e., describe what is that we want to achieve. Next, indulge in brain storming for few hours, capture all ideas generated. Note: During brain storming, do not juge the ideas or do any analysis of the idea, just generate ideas and document the ideas.

The next step is the critical thinking or critical analysis. In this step, people will collectively analyze all the ideas generated and look at the merits/demertis of the ideas, combine different ideas, select few ideas for further analysis or converge on few ideas for implementation.
Critical thinking is quite a challenge. The ideas generated during the divergent thinking phase often looks impractical but in the critical thinking phase we need to extract practical ideas out of new, untried, untested, bold, radical, crazy, impractical-at-the-first-sight ideas. This process is what I call "Ideas to concept".

There are tools and methods for developing ideas into concepts and I will write about it in future. For now, lets just say that during the critical thinking process, we have to analyze all the ideas generated and select few ideas for further analysis or converge on few ideas for implementation.

This process will give richer and more distinguishing ideas for implementation and will almost certainly give you a competitive edge.

However, I must warn you that there are great dangers in divergent thinking. Firstly the stake holders (& the organization) must be open to new/radical ideas, else all efforts are bound to fail. Secondly, it takes courage to present and implement a bold/radical/new idea - often times, people have natural tendency to confirm with the surroundings and not to be an odd-man-out.

Closing Thoughts

Divergent thinking is a very powerful way of thinking up new ideas. In recent times, several leading thinkers and practitioners have successfully demonstrated it: Starting with Leonard DaVinci, General Rommel, Field Marshall Montgomery, Steve Jobs, Steven Spilberg, Ophra Wenfrey, Mahatma Gandhi and lot more.

Also read:

Lateral Thinking Skills by Paul Salone
Lateral Thinking by Edward de Bono

Divergent Thinking Abilities

Divergent thinking - Wikipedia, the free encyclopedia

Managing Cultural Integration post M&A

Year 2007. Indian companies have gone on an acquisition spree. According to Dun & Bradstreet, 243 M&A deals were concluded in the first 5 months worth a staggering $46.8 billion!! Most of these were acquisitions overseas by Indian companies. And the rate of these M&A activities shows no sign of slowing down.

Compared to the year 2006, the total value of M&A deals was a miserly $20.6 billion.

Local economy is driven by robust growth, buoyant demand & a strong surge of confidence. This effect is seen in increasing FDI inflows, resurgent stock market and long term Indian investors. Thus the increased inflow of capital and strong growth prospects is driving Indian companies to acquire companies abroad.

Indian companies have so far been able to manage these acquisitions quite well. But this time the challenges are bigger and there is lot at stake. The biggest challenge facing Indian firms after acquiring companies in other countries is that of Integration - more specifically Cultural Integration. As Indian companies are now acquiring global companies such as Corus Steel, Novelis, Flag Telecom etc., the challenge to integrate different work cultures is a daunting task.

Just to illustrate, long time Corus employees in UK were aghast when they heard of the possibility that an "Indian" company will acquire them, and they will have an Indian boss - whose name they cannot pronounce. Similarly, Novelis employees will not be able to pronounce the name of their new Chief - Kumaramangalam Birla!

Under such circumstances, think about the challenge of cultural integration.

To make these acquisitions work and deliver results as per share holder’s expectations, acquiring companies must overcome the challenge of cultural integration.

Why is Cultural Integration such a Big Challenge?

Cultural Integration is never easy. Even global companies struggle with it even now. The reasons why cultural integration is such a huge challenge are:

1. Cultures build prejudices which is often influenced by history. Most Europeans & Americans view India as a third world country, poor country and as a backward country. This distorts the current reality and people have difficulty to come to terms with the acquisition.
   
2. Corporate culture is an amalgamation of: National culture, Religious culture, and professional culture. These cultural dimensions are often invisible - but ever present & relevant.
   
3. Need to balance the local needs and the global needs during the post-acquisition period. These needs may be the local community demands, business demands, investors demands etc.
   
4. Need to meet the high expectations of the share holders post-acquisition. Often times these acquisitions are financed through LBO or debt, and this needs a good cash flows to sustain. In addition, the management will be under pressure to show the benefits of acquisition as promised before the acquisition
   
5. Lack of Experience in dealing with a different culture. This applies equally to Indian & foreign company managers. Most managers lack the cross-cultural skills needed during the post acquisition integration.
   

Changing the HR paradigm

For a long long time in India, the concept of human resource management meant only Industrial Relationship management. Indian HR Managers became experts in dealing with unions, all IR related issues and today they have to deal with this complex challenge of cultural integration. For most organizations, cultural integration is a new challenge never before seen in India.

How to overcome this Challenge?

Cultural Integration is not an easy challenge and therefore there are no simple answers or no single correct answer. The options of all available tools and solutions is just as large as the problem itself - and that makes it even tougher to overcome the challenge.

The task of cultural integration must be headed by "two-in-a-box" leadership, where one person from each company are assigned equal responsibility and they work in a team. For example in Tata-Corus merger, there must be two persons who share the responsibility for cultural integration.

• Identify the problem
  
  Based on my experience, I would say that if the company’s HR managers were to identify the scope and dimension of the challenge, then they have 25% of the solution. I often say that correctly defining the problem itself is the biggest challenge - once the problem is correctly defined, finding the solution is mearly an exercise of logical analysis.
  Identifying the scope, the nature and the dimensions of the challenge will require in-depth survey & analysis of employee behavior, attitudes and responses. This is best done by a third party consultant(s) who is seen as a neutral entity by all employees.
  
  
• Develop common policies & procedures for the combined organization
  
  Policies & procedures of the newly combined organization must have a great amount of commonality - but without imposing it forcefully on the employees. By this I mean, the new policies/procedures must be developed which takes both sets of employee’s interests into considerations and avoid imposing the policy/procedures of the acquirer company on the acquired company. The new policy & procedures must be accepted by both sets of employees.
  
  
• Build a cultural integration Roadmap
  
  Cultural integration will take a long time - often several years. It is therefore essential to have a roadmap for this integration which shows important milestones and accomplishments. Some of the milestones & accomplishments can be: Cross-Cultural training, Success of Inter-company transfer employees (rather % success of the transferred employees), measurable aspects such as employee behavior & attitudes towards coworkers from the "other" organization, level of cultural awareness etc.
  
  
• Hire a Cross-Cultural Consultant
  
  During cultural integration, it is important to be seen as fair and reasonable by all employees. Often times, existing company managers are influenced by the past records & history and their decisions cannot be guaranteed to be fair or neutral - more over there is an element of mistrust by one set of employees. It is therefore very important to hire an outsider - a neutral third party consultant to deal with sensitive issues.

The main advantage of having a third-party consultant is that they bring in the expertise needed to carryout the cultural integration. Consultants have the expertise in developing company policies, establishing procedures, conducting survey’s, analyzing these survey results, conducting the required training's etc., Due to their high level of expertise, employees often have a high regard to these consultants and are seen as neutral arbiters in a conflict situation. (which is often in the early days of acquisition)

Closing Thoughts

Benefits of global acquisitions are HUGE, and so is the risks. To make these global acquisitions succeed, one must overcome the challenges of cultural integration - which are complex and hidden.

In this article, I have just highlighted the main issues of cultural integration involved in a global M&A. There is lot more to it and I can keep on writing about it. If you need more information, please feel free to contact me at - kvarun@hotmail.com or arun@ninedots.in

Is the Indian IT revolution Over?

Rising Rupee, Prospect of losing income tax holiday, Slowing US economy and the Sub-prime mortgage crisis et al, has taken a toll on the Indian IT sector. Indian IT Giant Infosys is now projecting a moderate revenue growth of 35%. While TCS reported the slowest new growth in last 7 quarters - with net income growth of only 26%.

It is clear that the tough business environment challenges are putting breaks on the rapid growth of Indian IT companies.

Accordingly, the stock markets have punished them. In the recent rally of BSE Sensex, the IT companies are no longer the darlings of the investors. The lack of investor confidence is showing through sagging stock prices. Stock prices of TCS, Infosys, Wipro, HCL, Satyam have all trailed the BSE Sensex.

Does all this mean that the Indian IT revolution is Over?

The answer is both "Yes" & "No".

Yes! The markets have changed

Yes - the era of revolutionary growth of 50%-100% year-on-year growth is over. From now on growth in revenue & profitability will be a major challenge, one that requires bold innovative management. Increasing competition from the global giants will see that Indian IT companies lose some accounts to Global majors.

Yes - the growth revolution is definitely over for small & mid sized Indian IT companies, especially those companies which offer run-of-the mill IT services. Companies such as Patni, Polaris, Aztec, ITC Infotech 3i-Infotech, L&T Infotech, iGate etc will find it harder to compete and some of them will even see a drop in revenue.

No! The growth Story continues

No - the growth story will continue. Indian IT companies will now make a steady march to become the top-10 IT companies in the world. Albeit at a slower pace.

Think of this situation as that of a mountaineer climbing a mountain. Till some stage, one can make a rapid progress, and then comes a point where the progress is slow and painstaking. Only the fit will be able to climb on further towards the summit. In the Indian IT context, only the best IT companies will now be able to grow - while others will falter. Companies which have a strong leadership, a bold vision and deep capability will be able to grow and reach the new heights.

No - The long term market conditions are still favorable to Indian IT companies. The overall global economy is showing a healthy growth. Asia, Europe and Latin America is experiencing very strong growth. Even the US economy is growing - albeit at a slower pace. Intel & IBM recently announced better than expected results - which is a string indication of growth in IT sector. This growth implies that there is a strong demand for IT services. The only question that remains is:

"Who will provide the required IT services?"
"Can Indian IT Companies tap into this growth opportunity?"

Added to the global growth in demand for IT & IT related services, the changing demographics of the US & European population shows a strong promise for the future of Indian IT companies. With an aging US & European population and ever tightening immigration laws means that more work has to be off shored to India or other places.

Thus, in short, the long term prospects for Indian IT companies looks good. The only question that remains is that: "Can Indian IT companies tap into this opportunity?"

What can Indian companies do?

Changing business environment calls for changing strategies as well. What worked in the last several years may not work in the future. Indian IT companies must therefore adapt to the changing situation - and take advantage of it. To begin with, some of the strategies Indian IT companies can adapt are:

Take advantage of the stronger Rupee & Go for Major Acquisitions
Take advantage of the stronger Rupee & go for expansion abroad
Take advantage of the huge human talent available & go for niche markets
Take advantage of Asian growth & Go after Asian markets
Build deeper relationships with customers

Play the Merger & Acquisition Game

Mergers & Acquisitions seems to be the flavor of the month. But I am not suggesting that Indian IT companies to opt for acquisitions just because its fashionable, but now with a stronger Rupee, it makes sense to go for it and acquire tier-II players in US & Europe - especially companies which have revenues of $ 1-8 Billion. These companies in general have lower profitability than Indian IT companies and they also trail the biggies (IBM, HP, Accenture, EDS) in terms of profitability. Companies such as KPMG, Cap Gemini, Unisys, CA, Covansys, Sapient etc., will be a good fit for Indian IT companies. These pure play services firms have high operating costs and merging them with Indian company will help lower their cost structures, improve profitability and deliver higher value to customers. US or Europe based IT services companies have a higher cost structures. Indian IT companies can acquire such companies, and transfer their low cost business models into these acquired entities - thus recovering the investment and gaining bigger chunk of the revenues.

These acquisitions will not come cheap, these acquisitions will be in the range of $3-20 Billion dollars, and Indian companies have to take on debt or do SPV (Special purpose Vehicles) or do an LBO (Leveraged Buy Out). Indian IT companies can take advantage of a stronger rupee and huge US client base to fund for these acquisitions.

Such big ticket acquisitions is not for the faint hearted. It takes lots of management skills, vision and guts to pull it off successfully. Given the history of Indian management talent and abilities, Indian IT companies do have the necessary management capability. Tata's, Lakshmi Mittal, Wipro etc., have shown their M&A skills in the past. Indian companies have the necessary management skills to do a successful acquisition - it now needs a bold vision and daring guts to execute such a move.

Expand Abroad

A strong Rupee & rapid growth in Asia & BRIC countries means that Indian IT companies should now concentrate on these markets for growth. Traditionally, Indian IT companies have depended on US & Europe for business. ( Almost 80% of revenues comes from US for most Indian IT companies).

Another good reason to expand in BRIC, ASEAN countries is that their currencies have not appreciated as much as Indian Rupee against the US Dollar. Chinese Yuan has appreciated by only 2.85% against the US dollar while Indian Rupee has appreciated by ~12%. This means that setting up operations in multiple countries will offset the risks if appreciating rupee and at the same time enable Indian IT companies to tap into the business opportunities in these countries.

Indian IT companies should look at expanding operations in Russia, Brazil, Poland, Romania, Mexico, Egypt, China, & Malaysia. These countries have the necessary talent base. Particularly Russia, Romania & Poland. These countries have first class educational system and Indian companies can hire engineers from these countries to serve the global markets.

Diversifying the talent pool of their employee base will help Indian IT companies compete better and gain a significant competitive advantage in the global markets.

Go for the Niche Markets

India has the second largest pool of engineers and scientists in the world. This talent pool has to be utilized carefully - by going into niche areas where competitive pressures are lower and bill rates are higher. For example, getting into R&D services - like Mindtree & Symphony Services is a good example of going into Niche markets. Targeting niche markets will ensure steady revenue growth.

Indian IT companies can look at growth opportunities in Electronics R&D, Pharma R&D, Aviation R&D, Embedded systems, Automotive technologies etc.
But to sustain high growth in niche markets, Indian IT companies will have to invest in developing the human talent and also invest in marketing efforts to build the customer base. Indian IT companies have the necessary talent - but this human talent has to be repositioned to serve higher margin customers - and that requires investments in training.

Build deeper relationships with existing customers

Having served the customer for several years, Indian IT companies should now aim to build a deeper relationship with them. Probably look at outsourcing the entire IT operations from their customers. (instead of providing piece-meal services) Indian IT companies should look at co-ownership of certain IT services/products and become a profit sharing partner. For example, HCL has entered into various revenue/proft sharing contracts with the customer. TCS won a $1.2 Billion contract from Neilson company.

Closing Thoughts

The current turmoil for Indian IT companies is an opportunity in disguise. This situation calls for consolidation and re-strategize for future growth. The era of rapid growth is definitely over, but Indian IT companies can still look at a healthy growth rates of 25% and above if they have the right vision and right management capability. I have highlighted few options available to Indian IT companies - and that too at a high level. But these options have to be explored further and executed upon inorder to grow and become world leaders in IT services.
Over the next two decades, if Indian companies execute properly, The largest IT companies in the world will be TCS, Infosys, Cognizant, HCL, Wipro, IBM, & Accenture (may not be in the same order)

Imagination Engineering

Imagination Engineering

An Example

Creativity requires imagination. Children have a great imagination & if it can be tapped effectively - it will lead to fantastic innovations. Often as adults we have grown up to accept things as they are and rarely challenge the status quo. But children are not like that at all - they challenge the status quo all the time. Recently, I was observing my daughter play with a cell phone. I observed how she uses the cell phone & this gave me few ideas for improving the cell phone.

One of the common problem everyone faces atleast once a week is searching for the TV remote. Invariably we always misplace the TV remote and spend a good amount of time searching for it. This problem is so persuasive that people have comeup with various ideas to help them find their TV remote like extra attachments, tying up the remote with a wire etc. Hotel’s also have a problem of disappearing TV remotes too.

Recently my daughter could not find the TV remote, so she picked up the cell phone, pointed it towards the TV and tried to use it as remote (but in vain). But her curious experimentation led me to comeup with a creative idea - build an intelligent programmable remote controller into the cell phone. Today’s cell phone has all the components to make a TV remote - and all it takes is to write a program to make the cell phone learn how to control the TV/Stereo/DVD etc.

The cell phone can interact with the TV/DVD/Stereo and automatically learn how to work as a remote. This added feature will solve all the problems searching for TV remote, fighting for TV remote etc.

Digital Arts

Lately, I have been blogging less and postings have become far apart. I have been utilizing my time into two creative pursuits: writing two books and digital art. I will write more about my book in future posts. For now I am going to post some of by digital art works. Enjoy.

Eco Damage

My Target

Lava on water

Imagination for Innovation

"Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world" -- Albert Einstein

Imagination is the fist stepping stone towards innovation. People imagine a future and then start to work towards making that that dream come true.

Often people ask me the question: "How can we create a culture of Innovation in our Organization?" The answer to question is quite complex and there is no one single answer. Probably there are as many possible answers as there are organizations. However, there are few root issues that are common to all innovative cultures: Strong leadership, Risk taking ability, creativity among all employees, ability to harness imagination into creative ideas, and the ability to harness creative ideas into commercially feasible innovation.

In my opinion, imagination forms the very foundation of creativity. Every innovation in the world today began as some nebulous idea or as an imagination of the future. People who are creative tend to have great ability to display their imagination.

Everyone of us are born with the natural ability to imagine things, to dream and fantasize. But most people are afraid to share that imagination with others and that ultimately stops them from implementing it.

Creative Individual

Every individual is creative. Some people have the ability to publicly discuss their imagination and few people have the ability to convert their imagination into reality. Those who are able to convert imagination into reality are called as creative persons or visionaries.

As an exercise spend some time to identify people whom you consider to be creative & list them down. Next do some research about them, about their imagination of the future etc. Or if possible interview them and ask about their imagination of the future. Once you do this study, you will notice that all these people have a very fertile imagination and they are willing to share that imagination with others.

If you are trying to build a culture of innovation, then you must start with encouraging people to share their imagination and also build a system to harness these ideas into reality.

As a photographer, before taking a picture, I try to imagine what the final result should look like: I mentally remove all the clutter, position the right scenery, the right lighting and the right moment in my mind first. Then I go about getting those things implemented - like choosing the right time to photograph, getting the composition, adjusting the light etc. In one photo session, I then take 300-400 pictures of which I choose 3-5 photos and discard the rest. The lesson I learnt from photography is that I get lots & lots of ideas - but only a few are worth something, the rest are best discarded. Creativity requires risk taking - the more I experiment, the better are the chances of getting the right picture.

Pablo Piccasso painted about three canvases a week - only to discard the other two. ( This is on an average). Da Vinci painted several works - but few became very famous: Mona Lisa, Madonna on the Rocks, Last Supper. But all of his works have their own merit of ideas.
Everyone of us is an artist - a creative individual. It just takes effort to bring out the master piece.

Imagination and the Organization

Modern organizations of the industrial age has often struggled with Individual creativity. Great Henry Ford always complained that why does the pair of hands (he has hired) comes with a brain?

Ford and several other industrial organizations have then developed several efficient techniques in form of management processes, rules & regulations that effectively kill the individual creativity. While the centrally planned innovation (read R&D Labs) worked great for several decades in the industrial age. But with then new information age or in the knowledge economy, these practices will not succeed. In 2005, Ford Motors spent a little more than $4 Billion Dollars on R&D - yet the company lost more than $12 Billion in the same year.

In this new information age or in the knowledge economy, imagination & creativity will be the central theme for growth and survival of all organization. To do that, long standing firms must change their way of life. Companies must make creativity & imagination as essential components of its business strategy.

Building a creative work culture is not easy. Organizations often times resort to hiring creative individuals - who then quit soon after. Hiring creative people first and then rushing towards innovation will not work - its like putting the cart in front of the horse. You got the right components but not in the right order. Once a major manufacturing company in India hired a talented engineer who was also a creative painter. After a few days at work, he decided to decorate his office with some of his paintings. But when the building maintenance manager ordered it to be removed - quoting a company policy: "All wall hangings must be inline with the company values and must approved by the management ..." Needless to say that the engineer quit his job within few months.

Creative people thrive in a creative organization - and for that the organization must setup a right work environment. Once the environment is conducive for creativity, creative people will gravitate towards it and soon the organization will be filled with creative folks. Just look at Google, Apple, & IDEO - see the talent these organizations are able to attract.

To create the right work environment for creativity, it is essential to understand the characteristics of imaginative people. If you are going to employ creative people, you must ensure that you can meet their needs and maximize their creative potential.

Work Environment for Creativity

All creative individuals have three basic characteristics: Strong Motivation, Risk Taking, & Social skills.

Artists, painters, writers etc., all have strong sense of internal motivation. They are internally motivated to create. However due to other factors if this motivation is removed their work suffers. Money is not a major motivator but is necessary to meet their needs. Encouragement, appreciation and enthusiasm from peers, superiors and co-workers is essential as motivating factors. The challenge for the organization is to build such an environment where creative talent is encouraged & people are motivated.

Creative people take risks. To implement an imaginative idea compels people to try out new things or try something different. In a workplace, this translates to being flexible enough to new approaches, not punishing failures, and encouraging people even when an idea failed.

Creative people are highly social. They thrive in teams of people who are also equally creative. (birds of same feather flock together) Developing a work culture centered around teams of equally creative individuals or even good listeners is essential.

Creating a right environment for creativity involves making some cultural changes. Imagination & Creativity blossoms in an environment which cherishes:

1. Freedom to try out new things
2. Encouragement to try new things
3. Recognition to individual & teams for their creative endeavors,
4. Organizational desire to be creative.
   

Freedom or empowerment of the individual is essential for creativity. Organizations often create several rules which inhibit creative freedom. The famous cliché is "Our people are free to try out new things - but only after they seek the necessary approvals" This attitude will not encourage creativity.

Encouragement for creative people can come from simple sources - a few kind words, spending time to understand their ideas etc. Leaders should take it on themselves to encourage everyone around them, and this should spread all across the organization. Employees must encourage their peers, superiors & subordinates to try out new things.

Creative people need instant recognition. This encourages them in their work. Often times, companies have recognition system - which will be their annual recognition & awards program. These annual awards program are good, but it does not serve the needs of the creative individual. The best solution is to have an instant "kudos" system where people can give an instant recognition award - without having to go through a formal procedure.
I have several organizations that have innovation boldly written in their mission statement or in the vision statement or in their goals statement. But at the work place, there is hardly any activity or encouragement to build a creative organization. Organization need to build a strong desire at the unit levels to be a creative organization. Ideally, this translates to having a role model, nominating the creative person of the month, happiest employee, having small but creative challenges - like paper aeroplane contest etc. These kind of small activities has a huge impact on creating a creative workplace.

Closing Thoughts

Creative organizations are the ones that promote the imagination of the individual - and encourages sharing those imaginations. Organization must build a work place and a worlk culture that encourages individual's imagination.

Creating such an organization from scratch is tough - and its a lot more difficult for existing organizations to change their work culture and become a creative work culture. Several Indian manufacturing firms who are planning to transform into a knowledge driven organization will find that they have to build a culture of creativity and innovation. This would imply changing the organizational culture and that's daunting task.

Service Innovation for SMEs

India is full of small & medium sized enterprises (SMEs). Today many of these firms are facing competition from global players or large companies. Typically these SMEs are run by the founders - who came up with a product or a service and they started the business. Over a period of time, the founders got fully engaged in running the business and they lost the focus on innovation. When a new competition emerges, founders of these SMEs are at loss - they do not have the time to innovate new products and all their waking hours are spent fighting against new competition, globalization and commoditization.

I have seen several enterprising persons who tried to innovate constantly - but in the end they were overcome by the forces of global economy. This story of SMEs is repeated all over the world - US, Europe, Asia, India et al.

Recently, I was asked by a owner of one such SME - " Given the fact that my business will be small - and can never grow to global scales, How can I innovate and be successful?" He makes and sells coffee powder in Bangalore. His line of business is now being threatened by giants such as Cafe Coffee Day, Barista, UniLever, Tata Tea & new competition such as Starbucks, Cafe Nero’s, McDonalds, etc. are around the corner.

Innovation Dilemma

The problem faced by the SME in Bangalore is vary familiar. The challenge must therefore be answered with innovation.

Given the risks of innovation and the amount of resources needed to sustain it, developing a new product line of gourmet coffee would be futile. Deep inside I knew the problem he was facing - he was caught in the middle of bloody Red Ocean & invariably he will be crushed if he stays put for long. I knew he needs to develop a Blue Ocean strategy. Discover a market place where he does not face competition at all.

Historically, These SMEs became successful through products. It is therefore natural for the founders to experiment with new product development. New product development is exciting - but it takes lots of work and the chances of success are slim. Given the level of Intellectual Property awareness among these SMEs, its doubtful that they would fully protect their innovation - thus becoming liable for cheaper imitation products. The best solution, therefore is to opt for service innovation. Innovating on developing innovative service or delivery to provide existing products to existing customers is definitely better.

Services today contribute to a large chunk of our economy. In developed countries, services account for more than 70% of the GDP. Given the vastness of the service domain, the scope of opportunity in services is equally vast. With ingenuity one can create immense competitive advantage. Innovations in business models, product delivery channels and customer experience can offer tremendous competitive advantages over global giants.

There are proven methods to lower the risks of innovation. For more details see: Minimizing Risks in Innovation

The coffee example

The coffee manufacturer in Bangalore - who sells commodity product decided to opt for the service innovation route - while keeping product improvements to be on par with the global giants. To begin with, he started offering custom coffee blends - where customers can get the kind of roast and the kind of blend they need. The coffee would be blended & roasted as per customer specification. This required quite some changes in the business models.

He also developed whole new range of coffee blends - spice blend, organic coffee, Brazilian Blend etc. These products could then be sold at a very high premium - at a price higher than that charged by Cafe Coffee Day or Tata Tea or Unilever. The choice of various blends of coffee and the ability to deliver these blends in small quantity - as low as 50gms for a premium price ensures higher profitability while avoiding direct competition from the global giants.

The second innovation he did was to enhance the customer experience. He tied up with several coffee estates in Kodagu ( about 250 Kms from Bangalore) and created a separate line of coffee estate tours. Customers could go and visit the estates where coffee is being grown. These visits will be arranged over the weekends and the customers have the option of buying coffee during the tour and after that tour in Bangalore. This service is similar to that of wine tasting tours conducted at Napa Valley in California.

This service innovation in form of enhanced customer experience will be unique and other global giants & local competitors will not be able to imitate that.

Both these innovations created an effective Blue Ocean strategy for this SME.

Implication to other SMEs

The opportunities for service innovation now also encompass innovations in business models, delivery channels, and the overall customer experience. Service innovation enables competitive advantage via better market position and greater responsiveness to customer requirements.

In order to maximize the benefits from service innovation:

1. One has to have a clear understanding that service innovation is not the same as invention.
   
2. Define Innovation in a broad context - look at all aspects of the value chain. Looking at all aspects of customer experience gives a wider scope for innovation.
   
3. Consider all value adding areas such as: business models, brand names, distribution channels, product delivery, operations and also the entire customer experience.
   
4. Look at other products/services that customers use along with your product or service. If possible identify areas where you can add value by forward or backward integration.

Such broad definition provide a vast opportunity for innovation. With this wide view - look for innovations; not just in products, also include services which provide commercial value.

Leadership for Innovation

Innovation always requires strong leadership. Creative ideas may come from all employees. , but to execute these ideas, one needs a strong leadership. Leadership for innovation at SMEs is no different than that in a large organization. In case of SMEs, the founders take up the responsibility for:

• Giving direction to the innovation efforts
• Encourage creative ideas from all employees
• Provide resources, technology and empower individuals to innovate.
• Encourage & promote cross-functional collaboration within the organization for innovation.
• Eliciting customer view points - often times leaders must directly engage with the customer to get customer’s opinions or customer’s point of view. Ideally, the leader should be able to identify a few lead customers on which innovative ideas can be tried
• Encourage innovation through out the organization.
• Setup policies and procedures to harvest creative/innovative ideas. The policies must be clear to all. The selection criteria for implementing innovative projects must be fair and understood by all.
• Have a clear cut policy that explains when to discontinue the innovation project. Make everyone understand why a particular project was/is killed.
• Avoid opacity and vagueness in decision making.
• Do not setup targets or mandates for innovation - leaders should not command people to be innovative. Instead encourage innovation.
• Recognize & reward innovation publicly.
• Talk passionately and candidly about innovation at all company events.

Founders and leaders at SMEs often find that these leadership behaviors that are needed for innovation is tough to develop and sustain. The main reason is that the owners/founders often believe that they "own" the innovation burden and hence they have the monopoly over all new ideas. Often times, the founders have come from a past work culture of ‘Command and Control" and that behavior led to the success of the firm till date. Unfortunately innovation does not flourish in a ‘Command and Control’ environment.

Founders/owners of SMEs often lose sight of customer’s point of view. With the initial success and focus on profitability - the founders often view the business solely from their own perspective. To regain the customer focus and to drive innovation it may be necessary for the leader to indulge in customer anthropology. (See Innovator’s tool box: Customer Anthropology). Ensure that the anthropology study includes the entire customer use cycle: from procurement to retirement.


Closing Thoughts

SMEs often find innovation as a big challenge. Most SMEs cannot cope up with market changes due to lack of successful innovation. Organizations that are successful are the one that fail the fastest. The leaders find it difficult to abandon practices that once made them successful and are unwilling to change. So when market conditions change, the old practices are no longer valid and the organization fails.

The challenges faced by founders of SMEs is similar to that faced in large organizations - only the scales are different. So the solutions are also similar - but SMEs have the size advantage. SMEs are inherently agile and can respond faster with innovation. SMEs suffer from lack of leadership for innovation and that leads to their failure. Most SMEs fail not because they were not agile - but because they did not have the right kind of leadership.

PS: In this article, I have briefly touched upon the leadership required for innovation. I welcome your comments and opinions on the same.

Customer Anthropology

Companies are always on the lookout to increase sales, increase their market share and increase their profits. One of the ways to accomplish all this is to improve their products. While the idea to improve existing products sounds so simple and easy - and every one ought to do it. The reality is starkly different - Companies often see their products as "perfect". Therefore they cannot identify areas for product improvement.

One sure fire method to go about this is customer anthropology.

In my previous article I had written about identifying unserved market or underserved market through "Product Opportunity Gap" (Also see Product Opportunity Gap). Identifying a Product Opportunity also requires huge amount of customer anthropology.

Author Tom Kelly has described the benefits of customer anthropology in his book - Ten Faces of Innovation

The benefits and the value of customer anthropology is so immense that global companies are doing it every where. Companies that are actively using anthropology to design new products are: Nokia, Microsoft, Intel, Volkswagen, TESCO, Toyota. The competitive advantage gained by the study is so valuable that these companies won’t easily admit it - or even publish the results of the study. The value of these studies is so huge that it all the study information is kept as company secrets.

See how Nokia does its study at : http://www.janchipchase.com/

In India, Ninedots Consulting offers consulting services for Innovation using customer anthropology.

What is Customer Anthropology?

Anthropology is the study of humanity & human behavior. The study originated from humanities and is mostly considered as an art rather than science. However in the modern days, Anthropology is becoming more of a science - and can be called as most scientific of humanities subjects.

Studying how customers use a product and what they do with it, why customers don’t use your product is customer anthropology.

I got this insight while working with sofware engineers at a software product company. I have worked as a R&D engineer, architect, as a marketer, as a product managers. I know how difficult it is to produce products which customers love. I'm intimately familiar will the common problems almost all software product companies face. At all stages of my professional life, I was curious to know how customers used the products we developed - and then slowly I began to observe the customer using the product and became an Anthropologist - Customer Anthropologist.

How to be a customer Anthropologist? Developing the skills

Being an anthropologist is not easy - nor it is natural. It takes certain special skills to observe and enquire. If you are a wildlife photographer -- you're almost there. Customer Anthropology is a lot like wildlife observataion. Watch & observe the user behavior. Observe the way customers use, how customers use your products, what they would do with it, what other products they use etc.

To be an effective observer, you may require customer permission. Getting permission from the individual user for a consumer product is easy. But for industrial products there may be complications. From experience I can tell you that getting permission from corporate users is tough.To get permission, the customer company managers need to understand the need, its benefits for them and they have to be debriefed after the study so that they can:

1. Learn something about what's not working in their own organizations themselves
2. Learn about Customer Anthropology so they can do it with their customers.

Doing the actual anthropology study requires some special observation skills:

• Ability to observe in a non-introsive way.
  Ensure that your observation does not alter the customer usage of the product.Observe the user environment and capture all the possible details. Since it is not humanly possible to remember all the details - use tools such as photographs, videos, audio recorders etc.
  
• Most importantly, do not judge the user. Do not allow your experience and your knowledge to help or aid the user. Just observe even when the user may be making a mistake. Please do not report the user mistakes as a use case for additional training. This will make the user feel dumb and will not help your case. You are there to observe and learn how to make your products better - and not to judge or evaluate the user.
  
• Make the user comfortable - so that they do not see you as a threat. Have a curious mind. Note down the observations & questions as it comes.Ask insightful questions at the appropriate time. The question types: What, Why, Where, When, Which, How. Ensure that you have asked the questions that are necessary to understand the user behavior.
  
  Remember that there might be a valid reason for using your product in a particular way. So it is useful to find out those reasons while observing and by asking appropriate questions.If possible use various recording devices - Audio or Video recorders. Taking pictures or short video clips will be very very useful for analysis.
  

See http://www.janchipchase.com/ for ideas on how to observe and record details.

Improving products by Observation

If you are conducting the study to improve your product, then must note down the following:

Use Patterns: Note down exacly how the user is using the product. Do not generalize - instead note down exacly how users are using your product. Observe the pattern and record it.

Other co-used products: Note down the other products used along with your product. These products may not be made by you or your company, but it is essential for the customer to use your product. For example, Nokia made a study of how customers chargetheir cell phones - observed how people in Uganda use car battery for charging cell phones.

User challenges: Observe the challenges the user has to overcome in oder to use your product. For example, several features in the cell phone are so difficult to access - that customers are discouraged from using them. Sometimes the user challenge may arise due to lack of a specific feature in your product.

User workarounds: Record all the user workarounds. Customers are innovative and whould have found a work around for a challenge. Document all the workarounds. User workarounds are the greatest source of product improvement ideas. It is a great source of innovative ideas. If possible video record it.

Alternate uses: Users are usually more intelligent than the inventor. Often times users will have discovered several alternate uses for your product and whould be using it in ways the inventors could not have imagined. Observing the alternate uses is a great source of innovative ideas. For example, people in Uganda use pre-paid cell phone charge cards for money transfer instead of using money orders from a bank.

User environment : Customer’s use of the product is greatly influenced by the user environment. Take effort to completely document the user environment - greater the detail the better.

While you are observing the customer/user use your products, Its is also useful to watch how they use your competitor’s products. Knowing the challenges the users face while using your competitiors product will give you an insight on how you can make your product better - and also know the strengths & weakness of the competiting products. Knowing this will help you exploit the weakness of competition and neutralize the advantages of the competitor.

Benefits of Customer Anthropology

Customer anthropology is one of the basic and the best tool for innovation. Customer anthropology study provides limitless opportunity for continuous product improvements and occasionally one can come up with radical innovation based on customer observations. Apple and Nokia, for example, are able to develop several best selling products - based on customer anthropology study. Apple’s iPod customers often complained that they hate to carry two divices - a cell phone and an iPod. This promted Nokia to release "N-Series" cell phones & Apple released iPhone.

Closing Thoughts

Customer anthropology study is not an easy thing for companies to implement. There are very few external agencies that are willing to do the study. The organization’s internal departments often are not equipped to conduct a full fleged customer anthropology study. As a result most organization find it hard to do. However, there is a solution to this problem - equip every employee to be an anthropologist i.e., train employees to do anthropogy study. Ninedots consulting in Bangalore offers consulting and training services to enable companies to do customer anthropology study.

I strongly suggest readers to read Tom Kelly’s book Ten Faces of Innovation

Also see: Customer Anthropology: The Art of Observation

Business Anthropology

Companies are always on the lookout to increase sales, increase their market share and increase their profits. One of the ways to accomplish all this is to improve their products. While the idea to improve existing products sounds so simple and easy - and every one ought to do it. The reality is starkly different - Companies often see their products as "perfect". Therefore they cannot identify areas for product improvement.

One sure fire method to go about this is customer anthropology.

In my previous article I had written about identifying unserved market or underserved market through "Product Opportunity Gap" (Also see Product Opportunity Gap). Identifying a Product Opportunity also requires huge amount of customer anthropology.
Author Tom Kelly has described the benefits of customer anthropology in his book - Ten Faces of Innovation

The benefits and the value of customer anthropology is so immense that global companies are doing it every where. Companies that are actively using anthropology to design new products are: Nokia, Microsoft, Intel, Volkswagen, TESCO, Toyota. The competitive advantage gained by the study is so valuable that these companies won’t admit it - or even publish the results of the study. The value of these studies is so huge that it all the study information is kept as company secrets.

See how Nokia does its study at : http://www.janchipchase.com/

In India, Ninedots Consulting offers consulting services for Innovation using customer anthropology.

What is Customer Anthropology?

Anthropology is the study of humanity & human behavior. The study originated from humanities and is mostly considered as an art rather than science. However in the modern days, Anthropology is becoming more of a science - and can be called as most scientific of humanities subjects.

Studying how customers use a product and what they do with it, why customers don’t use your product is customer anthropology.

I got this insight while working with software engineers at a software product company. I have worked as a R&D engineer, architect, as a marketer, as a product managers. I know how difficult it is to produce products which customers love. I'm intimately familiar will the common problems almost all software product companies face. At all stages of my professional life, I was curious to know how customers used the products we developed - and then slowly I began to observe the customer using the product and became an Anthropologist - Customer Anthropologist.

How to be a customer Anthropologist? Developing the skills

Being an anthropologist is not easy - nor it is natural. It takes certain special skills to observe and enquire. If you are a wildlife photographer -- you're almost there. Customer Anthropology is a lot like wildlife observataion. Watch & observe the user behavior. Observe whay customers use, how customers use your products, what they would do with it, what other products they use etc.

To be an effective observer, you may require customer permission. Getting permission from the individual user for a consumer product is easy. But for industrial products there may be complications. From experience I can tell you that getting permission from corporate users is tough.

To get permission, the customer company managers need to understand the need, its benefits for them and they have to be debriefed after the study so that they can:

1. Learn something about what's not working in their own organizations themselves
2. Learn about Customer Anthropology so they can do it with their customers.

Doing the actual anthropology study requires some special observation skills:

Ability to observe in a non-introsive way. Ensure that your observation does not alter the customer usage of the product.

Observe the user environment and capture all the possible details. Since it is not humanly possible to remember all the details - use tools such as photographs, videos, audio recorders etc.

Most importantly, do not judge the user. Do not allow your experience and your knowledge to help or aid the user. Just observe even when the user may be making a mistake. Please do not report the user mistakes as a use case for additional training. This will make the user feel dumb and will not help your case. You are there to observe and learn how to make your products better - and not to judge or evaluate the user.

Make the user comfortable - so that they do not see you as a threat. Have a curious mind. Note down the observations & questions as it comes.

Ask insightful questions at the appropriate time. The question types: What, Why, Where, When, Which, How. Ensure that you have asked the questions that are necessary to understand the user behavior.

Remember that there might be a valid reason for using your product in a particular way. So it is useful to find out those reasons while observing and by asking appropriate questions.

If possible use various recording devices - Audio or Video recorders. Taking pictures or short video clips will be very very useful for analysis. See http://www.janchipchase.com/ for ideas on how to observe and record details.

Improving products by Observation

If you are conducting the study to improve your product, then must note down the following:

• Use Patterns: Note down exacly how the user is using the product. Do not generalize - instead note down exacly how users are using your product. Observe the pattern and record it.
  
• Other co-used products: Note down the other products used along with your product. These products may not be made by you or your company, but it is essential for the customer to use your product. For example, Nokia made a study of how customers charge
  their cell phones - observed how people in Uganda use car battery for charging cell phones.
  
• User challenges: Observe the challenges the user has to overcome in oder to use your product. For example, several features in the cell phone are so difficult to access - that customers are discouraged from using them. Sometimes the user challenge may arise due to lack of a specific feature in your product.
  
• User workarounds: Record all the user workarounds. Customers are innovative and whould have found a work around for a challenge. Document all the workarounds. User workarounds are the greatest source of product improvement ideas. It is a great source of innovative ideas. If possible video record it.
  
• Alternate uses: Users are usually more intelligent than the inventor. Often times users will have discovered several alternate uses for your product and whould be using it in ways the inventors could not have imagined. Observing the alternate uses is a great source of innovative ideas. For example, people in Uganda use pre-paid cell phone charge cards for money transfer instead of using money orders from a bank.
  
• User environment : Customer’s use of the product is greatly influenced by the user environment. Take effort to completely document the user environment - greater the detail the better.

While you are observing the customer/user use your products, Its is also useful to watch how they use your competitor’s products. Knowing the challenges the users face while using your competitiors product will give you an insight on how you can make your product better - and also know the strengths & weakness of the competiting products. Knowing this will help you exploit the weakness of competition and neutralize the advantages of the competitor.

Benefits of Customer Anthropology

Customer anthropology is one of the basic and the best tool for innovation. Customer anthropology study provides limitless opportunity for continuous product improvements and occasionally one can come up with radical innovation based on customer observations. Apple and Nokia, for example, are able to develop several best selling products - based on customer anthropology study. Apple’s iPod customers often complained that they hate to carry two divices - a cell phone and an iPod. This promted Nokia to release "N-Series" cell phones & Apple released iPhone.

Closing Thoughts

Customer anthropology study is not an easy thing for companies to implement. There are very few external agencies that are willing to do the study. The organization’s internal departments often are not equipped to conduct a full fleged customer anthropology study. As a result most organization find it hard to do. However, there is a solution to this problem - equip every employee to be an anthropologist i.e., train employees to do anthropogy study. Ninedots consulting in Bangalore offers consulting and training services to enable companies to do customer anthropology study.

I strongly suggest readers to read Tom Kelly’s book Ten Faces of Innovation

Also see: Customer Anthropology: The Art of Observation

Incremental Innovation tool: Buyer Utility Map

In my earlier article titled "Dimensions of Innovation", I had mapped when one should pursue incremental innovation and when to pursue radical innovation.

Product managers are responsible for improving the product throughout the product life cycle. In order to enhance the product life, the company will invest in the product in form of incremental innovation.

Incremental Innovation is primarily driven by very high competitive pressures and low risk tolerance. Companies that rely on technology based products (or manufacturing process) often tend to follow incremental innovation. Product managers at Intel, Dell, Lexmark, Cisco, AMD, Lenevo, Nvidia, ATI, Adobe, Microsoft, Oracle, etc. survive solely on incremental innovation.

Product managers have a clear mandate in terms of innovation they can pursue - Incremental innovation, the challenge for the product managers is then to figure out what incremental steps to be taken. Identifying these steps are not easy. However there exists several systematic process or a method to identify opportunities.

One such method is: The Buyer Utility Map.

The Buyer Utility Map was developed by W.Chan Kim & Renee Mauborgne. It was first published in Harvard Business Review, September-October 2000.

Buyer utility map is a tool which helps product managers to identify which business ideas have real commercial potential, identify areas of incremental innovation - by enhancing customer (buyer) utility.

Mapping a product across the buyer utility matrix - will help identify the current positioning w.r.t competitive products. This will help create new products/services - that offer exceptional value for its customers and differentiate from competitive products. Understanding the utility of the product and reposition of existing products/services is vital for market segmenting & positioning.

What is Buyer experience cycle?

Buyer experience cycle refers to all the activities the buyer will do with the product - right from purchase to its disposal. The buyer experience cycle covers the total customer’s product experience. It is based on the customer resource life cycle and consists of six stages:

1. Purchase
   Purchase stage includes buying experience, product evaluation, Financing, negotiation, Contracts, SLAs, Pricing etc. Concentrating on each phase of the purchase experience will help improve the buyer experience. For example, Dell’s success to a great extent can be attributed to its ease of purchase via web or phone. Similarly, AOL succeeded initially by widely distributing its software (for free) at stores, with newspapers etc. The ease of purchase or easy availability has a significant impact on the buying decision.
   



2. Delivery
   Delivery stage is the one between the actual purchase to its commercial/actual use. This includes physical delivery, training, installation, on-site testing etc. The initial success of Amazon.com can be directly attributed to the delivery - i.e., customers could order rare or difficult to get tiles & have it delivered to their homes. Another success story is that of 1-800-FLOWERS. The company excelled in delivering fresh flowers anywhere in the US - thus making it a household name.
   



3. Use
   Use stage refers to actual use of the product/service for its intended purpose. Often times the user will be different than the purchaser - but user will have a high level of influence over the buyer in all buying descisions. Understanding how people use a product/service and knowing their pain points is vital for incremental innovation. (see Innovator’s Toolbox: Customer Anthropology ) Nokia became the world leader in cell phone handset market mainly by focusing on how customer’s use cell phones and then developing (incremental innovation) its products to make Nokia phones even more easier to use.
   



4. Supplements
   Supplement stage refers to how users use your product along with other products/services. Most products/services will need other supporting products. Knowing how your product/service works with other products and improving the interaction will make customers happy.
   
   Recently Microsoft made it difficult for "Google Desktop" software to function smoothly with its Vista software. Similarly, Apple made it mandatory for users of iPod to use iTunes as MP3 management software. These are the cases where companies which have monopoly in the market place create hurdles for competitive products.
   
   Today, companies follow standards to ensure ease of interoperability. Wi-Fi, WiMax, Bluetooth, Ethernet, etc., are the common standards which ensure ease of interoperability. Understanding the complete list of supplements that are needed for the customer to use your product gives you an edge in terms of incremental innovation. It allows you to improve your product such that the customer can eliminate the use of a suplemental product. This strategy has been adapted by Microsoft in is Windows product line. Microsoft initially included Internet explorer with its Windows operating system. This eliminated the user’s need for another browser - Netscape.
   



5. Maintenance
   Ease of maintenance & cost of maintenance is very important to all buyers. No user will buy a car that is difficult to maintain or that has a high cost of maintenance. Warranty & guarantee issues must be looked into at a great detail in order to identiy opportunities for incremental innovation. Understanding the maintenance issues helps identify various ways improve the product. The success of tubeless tyres, Michelin’s Tweel is a good example of captilizing on user’s product maintenance issue.
   



6. Disposal
   Disposing a product also includes: selling it off, recycling, upgrading the software, data migration etc. Today due to environmental concerns companies such as McDonalds, Caterpillar, Toyota, Honda, GM, Dell, HP, etc are spending time & effort to design their products that are recyclable. Auto manufacturers also help customers dispose thier existing cars through their pre-owned car sales teams.

These six stages represent the stages in which the customer is involved with the product. Developing successful products requires a deeper understanding of buyer utility levers during each stage of buyer experience cycle.

The Six Utility levers

The six utility levers are the ways in which utility can be offered to the customer.

1. Customer productivity
   This type of utility lever can increase customers’ productivity by helping them to do things faster, better, or in different ways. An example of increasing customer productivity is the financial information company Bloomberg. They made traders more efficient by offering instant on-line analytics. SAP’s ERP solution became a great success - despite its high cost, difficult to install & maintain - Mainly because SAP was able to improve customer productivity.
   



2. Simplicity
   This type of utility lever makes life easier for the user of the product or service. IRobot’s Verro - a swiming pool cleaning robot became an instant success because it make the task of cleaning the swimming pools so simple & easy for the user.
   



3. Convenience
   The convenience utility lever is a luxury, which lets a customer save time or frustration. ATM’s is an example of the convenience lever. It saves customer’s time and frustration, because he/she does not have to go to the bank anymore to get cash.
   Similarly, newspapers in the USA were able to hold-off competition from Internet & cable TV through the convenience of having the paper delivered to homes. GM took a note on the convenience factor when designing Saturn Cars - and developed a whole new way of selling cars though a chain of customer friendly dealers.
   



4. Risk
   Another lever which is the risk lever. Customers in general are risk averse. Developing a product/service that lowers risk will become a product differentiator. For example, Online tracking of shipments by Fedex and UPS gives customer the satisfaction of choosing a risk free alternative over the US Post - and for that, the customer is willing to pay a premium.
   
   In some cases, the adventure and thrill involed in high risks can attract customers. Adventure sporting companies have sprung up all over the world to cater to this need of the customer.
   



5. Fun and image
   The fun and image lever provides fun and image to the customer. Apple’s iPod is a good example of using this lever. Customers obtain a fun and a trendy image by buying one of the MP3-players from Apple. Manufacturers of luxury goods often rely on the Image factor.
   



6. Environmental friendliness
   This utility lever is providing friendliness towards the environment. For example, the initiative of fast-food chain McDonalds to recycle materials and reduce material content can be seen as usage of the environmental friendliness utility lever.

The buyer utility map process

The buyer utility map can be used for four main activities:

1. Locating new product



2. Improving Existing product



3. Positioning new product or repositioning existing products



4. Market research

Locating the new product Identifying current products within the buyer utility map is the fist necessary step. For example, take Nokia’s N-series cell phones & map it. This is an existing product and it can be mapped as shown in figure below.

Positioning a new product

Apple introduced a new cell phone which does not directly compete with Nokia’s N-Series or other cell phones in the market. IPhone’s position can be illustrated as:

If Nokia were to respond via incremental innovation, then it now knows what modifications it must do & how to reposition the product.

Closing Thoughts

Buyer’s utility map is a powerful tool to develop new products. These products can be developed through incremental innovation or radical innovation. But this tool is ideal for identifying incremental innovation opportunities.

A product manager’s job is to develop the product road map, identifying product improvement areas and position/reposition the new products. In these aspects, buyer utility map is a powerful tool to identify new opportunities, identify existing product gaps and develop new products.